Steve writes editorials for each issue of Forbes under the heading of “Fact and Comment.” A widely respected economic prognosticator, he is the only writer to have won the highly prestigious Crystal Owl Award four times. The prize was formerly given by U.S. Steel Corporation to the financial journalist whose economic forecasts for the coming year proved most accurate.

In both 1996 and 2000, Steve campaigned vigorously for the Republican nomination for the Presidency. Key to his platform were a flat tax, medical savings accounts, a new Social Security system for working Americans, parental choice of schools for their children, term limits and a strong national defense. Steve continues to energetically promote this agenda.

Charles de Vaulx On Stocks: Buying The Best House In A Bad Neighborhood

Charles de Vaulx is chief investment officer at International Value Advisers. I recently sat down with Charles to talk about his style of value investing, why he doesn’t worry too much about EBITDA and the challenges of oversees investing. Part one of our conversation follows in a video and transcript.

Steve Forbes: Charles, good to have you with us. You’ve had a long and distinguished career, and I want to begin by asking you to define “value investing.” It’s a term everyone uses, but people have various definitions of it. So, what is your definition of “value investing”?

Charles de Vaulx: The basic definition is the belief that there are at times discrepancies between the intrinsic value of a company and the price at which that stock trades. So sometimes we try to identify companies, when there’s a large gap between the price of the stock and what we think the real value of the company is. Having said that, we have always had a bias towards better businesses; in other words, those that are able to compound their value over time.

Forbes: Are those harder to find than the trash companies?

de Vaulx: Those are much harder to find, obviously than the net-nets, the cigar butts Ben Graham (PH) talked about. But if you can find those, the beauty is that time becomes your friend. If you buy into an average of mediocre business, you need that gap between the price and value to be closed as quickly as possible. You need, the old man to die. You need a new management to come in and restructure.

Forbes: A catalyst?

de Vaulx: You need a catalyst. Conversely, if you own a compounder, then time becomes your friend. And we also have a clear bias, Steve, towards companies with significant insider ownership. We believe that eating your own cooking is a very powerful thing whether it’s us as money managers, or

Forbes: Talk for one second about what you do about eating your own cooking?

de Vaulx: Well, I eat quite a lot of it. I think collectively the 42 people that work in our firm have north of $100 million of our own money in the funds we manage, which for us is a significant amount.

Forbes: And those are two funds?

de Vaulx: Those are two funds, one which is Global, the whole-world one, which is international only.

Forbes: International being non-US?

de Vaulx: Being non-US, right. So we do believe, and it’s been proven historically, that companies, when insiders own a lot of the shares, tend to do a much better job. They care more. They have a longer-term vision. So if you want to invest in companies with significant insider ownership, these companies tend to be smaller. What gives the float, what trades in the market, what’s not held by the family, may be smaller, so you can’t get in and out of these positions easily. So in principle, you have to be willing to hold onto these shares for many years. So you need to believe that the intrinsic value of those companies can grow to some extent over time.

Forbes: Now how do you do your screening, so to speak? Especially since you do the whole world?

de Vaulx: Well, most value investors do their screening by focusing first and foremost on the price. They try statistically to identify cheap-looking stocks, stocks that trade at a low PE ratio. Stocks that offer a high-dividend yield. Stocks that seem to tread at a low price-to-book basis.

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